Definition

The term gross production tax is used to describe a state-level tax paid by companies that produce oil, natural gas as well as miners of metals, coal, and minerals. Gross production taxes not only generate revenues for the state, but also compensate them for the pollution caused by these industries.

Explanation

Also known as a severance tax, a gross production tax is typically levied by states on companies in the mining and drilling industries. The tax is usually calculated based on the value of each unit extracted from the earth. For example, the state may impose the tax based on the price of crude oil or natural gas as determined by a state-level commission. Gross production taxes are usually deductible on the company's federal income tax return.

States that impose this tax typically target those companies that are depleting a non-renewable natural resource, including drillers and miners of oil, natural gas, metals and minerals. The tax is not only a source of revenues for the state, but can also be used to clean up the pollution caused by these companies. In addition to gross production taxes, states may also levy an extraction tax against these companies. States with gross production taxes include Alaska, Colorado, New Mexico, Oklahoma, and Wyoming (August 2014).